DC Weighs in Strongly on Third Party Marketer Delivery Services

On August 13th the District of Columbia ABC Board issued an Advisory Opinion directed at third party marketers who develop websites and apps that allow consumers to purchase alcoholic beverages from brick and mortar retailers and have them delivered.  The DC Advisory is not directed at any particular company, but there are a number of such third party providers (“TPPs”) opening up in various cities throughout the U.S. this year and the service they are providing is a fairly new one.  No state regulators have weighed in on this particular model, other than the New York State Liquor Authority in its declaratory ruling last fall on Drizly.

The DC ABC Board does allow TPPs to “connect customers through the internet to a licensed off-premise retailer, as long as the transaction to purchase alcoholic beverages occurs between the consumer and the licensed retailer.”   The retailer must retain control over the transaction funds, and must be the one who makes the decision whether to fill the order or not; the retailer also must be the one who stores, packages, fills, and ships the orders.

The DC Advisory cites three other jurisdictions that have issued advisories on TPPs in general – California, New York, and Texas – but ends up going beyond them all in restricting the permissible activities of TPPs.  The following guidelines illustrate this narrow scope:

  • The TPP cannot charge consumers’ credits cards or directly or indirectly collect or receive funds from the consumer.  The Advisory explicitly says it disagrees with the portion of the CA Advisory that allows TPPs to charge the credit card (and pass the full amount of funds to the retailer).
  • The delivery person must be either the retailer, an employee of the retailer, or a “contractor of” the retailer.
  • The sales transaction must occur directly between the consumer and retailer “through a separate written agreement.”
  • The TPP fee cannot “stem from the transaction between the consumer and licensee” – that is, it must either be a flat fee, or else bear no relation to the transactions. It cannot be based on a percentage of the sale price.

The DC ABC Board appears to consider noncompliance with any of the foregoing to constitute (a) a violation by the retailer of the terms of its license (i.e. acting as an agent for a third party who is not a licensee); and (b) a violation by the TPP of DC’s statute prohibiting alcohol sales without a license.

One variation of the TPP delivery models that appears to comply with the DC guidelines is the Drizly model, which received a positive declaratory ruling from the NY SLA last fall.  Drizly is a TPP that markets retailers’ products on its app, and provides the technology necessary for the interface between retailer and consumer via the app, but the consumer’s funds are received directly by the retailer; the retailer or its employees deliver the products; and Drizly’s fees are flat fees rather than a percentage of the sales.

Though not mentioned in the DC Advisory, there is a 1995 Florida regulation that allows certain delivery service providers to act as agents of the consumer and may be helpful to today’s high tech service providers. The California and Texas advisories were directed at TPP models in general, not specifically to smartphone app delivery models, but they provide good guidance for all TPP providers who plan to operate in those markets.  For those looking to service the DC market, the safe harbor just got significantly narrower.

Hard Cider Legislative Update

Hot on the heels of the craft beer revolution, hard cider is experiencing its own renaissance. Small labels are proliferating and widely available at retail locations, and cider bars are opening in major cities across the country. Hoping to capitalize on the craze, even larger producers like Stella Artois and Miller Coors are getting in on the action with Cidre (marketed towards women who would ordinarily choose white wine) and Smith & Forge (marketed towards men who would ordinarily choose beer). With so many new producers and products on the market, the confusing regulatory framework surrounding cider is now in the spotlight. Cider (including perry, or pear cider) has long resided in a legal grey area because it is regulated like wine (as it is made with fermented fruit), but often packaged and distributed like beer. Many consumers also treat cider as a substitute for beer, although this is changing (as Stella Artois is hoping with Cidre). This has led to many practical problems that states and the federal government are wrestling with. Below is an overview of recent legislative issues pertaining to cider – stay tuned for updates.

Federal Regulation

As TTB treats cider like wine for registration and labeling purposes, cider producers must register as a bonded winery, pay tax and follow other rules for winery operation per 27 CFR part 24, including TTB-enforced wine label requirements. However, the FDA, and not the TTB, has jurisdiction over the labeling of “diluted wine and cider” that contains less than 7% ABV.

Further complicating matters, TTB does not always treat cider like wine for the purposes of taxation. Depending on the sugar content of apples and the production technique, cider can be taxed like beer (if ABV is less than 7%), wine (if ABV exceeds 7%), or sparkling wine (if CO2 levels exceed a certain level).  As explained by the United States Association of Cider Makers:

Because many cider producers are small, craft operators, who rely on natural raw materials, they often have little ability to predict and control the precise alcohol content and carbonation level of their product. Meanwhile, cider consumers expect a somewhat high level of carbonation, equivalent to that of most beer.

To address these issues, Senators Chuck Schumer of New York and Patrick Leahy of Vermont are pushing legislation introduced last fall by Earl Blumenauer of Oregon (S 1531/ HR 2921) that would change the Internal Revenue Code to create a specific definition for hard cider (which would include pears) and tax it at the same rate as beer. The definition would also include a higher level of carbonation and align the allowable alcohol-content with the natural sugar content of apples (at least one-half of 1% and less than 8.5% ABV).

California

As mentioned in a previous Booze Rules post, AB 779 now permits a beer manufacturer who produces more than 60,000 barrels of beer per year to also manufacture cider. Until now, anyone who wanted to produce cider in California needed to obtain a winegrower’s license. This is still true for smaller craft producers, as the licensing exception only applies to larger operations. It is yet to be seen whether the small producers will demand equal treatment.

Colorado

HB 1346, backed by AB InBev and Miller Coors, would have allowed companies that make beer and also have an interest in a Colorado distribution company to import cider products directly without having to go through a specially licensed wine and spirits distributors, as cider imports to Colorado do now (because cider is classified as wine, beer distribution companies can’t directly import cider made out of state and sell it to retailers in Colorado). The bill was opposed by small producers and wholesalers who saw the legislation providing an unfair advantage to two wholesalers in the state owned by AB InBev and Miller Coors. Citing complexity and limited time remaining in the legislative session, the bill’s sponsor asked that it be tabled for future debate. More information can be found at the Denver Business Journal.

Maryland

Maryland’s 2014 legislative session included SB 0161, which amended the definition of hard cider to include pears. Hard cider in Maryland is taxed like beer (at 9 cents per gallon) and must be less than 7% ABV.

New York

As mentioned in a recent Booze Rules post, the NYSLA is proposing sweeping statutory revisions intended to revise and streamline the NY ABC law. With respect to cider, direct to consumer shipment rights would be extended to craft cider producers, and any producer with a NY direct shipping permit (including cider producers) would be able to ship products produced by others if those other producers were located within a 50-mile radius of the shipping producer. Additionally, manufacturers and “brand owners” would be able to obtain a permit to sell cider by the glass at special events. Liquor, wine and beer wholesale licenses would include the right to sell cider at wholesale.

 

New Marketing Model for New York – Lot 18 and the NYSLA

On April 23, the New York State Liquor Authority held a hearing on Lot 18’s request for declaratory ruling on (as worded in the request for ruling), the “validity of using nationally recognized marketing companies to market wine clubs in New York State, which are offered for sale by a New York State licensed package store.”  The hearing was interesting and informative for anyone in the business of marketing wine to NY consumers. Lot 18 told the NYSLA in the hearing that it has secured a NY retail package store license (and location) and plans to provide product and fulfill orders for third party marketers, including the Forbes wine club.    As a licensed retailer, Lot 18 will be doing most of the work in connection with the Forbes Wine Club orders (accepting the orders, taking the consumer’s payment, customer service, and making the delivery arrangements).  Lot 18 will be purchasing the inventory for the Forbes Wine Club in advance of taking customer orders.

Based on the comments and questions by the SLA Board members at the meeting (most questions were friendly and the approach was approving), it appears likely that the SLA will approve Lot 18’s model as presented.

During the meeting representatives of other NY package stores spoke, or rather, aired their grievances regarding the Lot 18 model.  Most of the remarks addressed the concern that if third party marketing entities were allowed to utilize the services of a NY retailer,  the perceived result would be the lack of a “level playing field” for regular retailers (regular retailers being, in this case, those who do not affiliate themselves with third party marketing entities).  The NY retailers also voiced concern that they wouldn’t have access to the same products that were being sold by Lot 18 for the Forbes club. Lot 18 responded that about 40% of their products are true private labels (owned by Lot 18), which can be lawfully restricted to Lot 18.  The other 60% would be available to other retailers through the NY wholesale system.

In response to the accusations that Lot 18 is not a bona fide retailer since its store is only 800 square feet and only open 30 hours a week, Chairman Rosen observed that the SLA had held two public hearings on Lot 18’s license application, and that after investigation, the SLA does in fact consider Lot 18 to be a bona fide retailer.  Chairman Rosen also noted that the SLA has no policy against just in time inventory models.

Chairman Rosen mentioned that the SLA has been receiving complaints that the agency is not  offering more guidance regarding the subject of Internet marketing, unlike – for example – the CA ABC, with its 2011 Advisory.  Chairman Rosen pointed out that the SLA’s declaratory ruling on ShipCompliant was lengthy, offered good guidance, and that rather than having strict parameters, using the “rule of reason” is a better method by which to evaluate Internet marketing programs.  This observation comported with H&C’s blog post following the ShipCompliant hearing making the same point.

The next event will be the Wine Cellar’s hearing on its similar request for declaratory ruling, which has been rescheduled for June 4.

Sweeping Changes in Proposed NYSLA Bill Include Expansion for Craft

The New York State Liquor Authority has been busy working on a series of statutory revisions that are intended to revise and streamline the provisions of the NY ABC law governing manufacturing and wholesale licenses. Retailers will also be affected. The SLA plans to submit the proposals to the Governor (who has announced he will be introducing a bill this session to address supplier issues) for his consideration, and held a meeting on April 17 to get input from the industry on the proposed revisions. Stay tuned for an update on the final outcome of this process because the politics and the lobbying from all sides may be fierce; especially over provisions softening the three-tier system in NY.  In the meantime, here are some highlights from the 122-page proposed legislation in its current form:

DTC:  Direct to consumer shipment rights would be extended to craft brewers and craft cider producers.  In addition, any producer with a NY direct shipping permit (winery, brewery or cider producer) would be able to ship products produced by others, in addition to their own, so long as those other producers were located within a 50-mile radius of the shipping producer. The 50-mile radius requirement is interesting because, for example, it would bring most (if not all) of Napa and Sonoma, for example, into the shipping radius for one winery.

Supplier Tastings: The bill would expand the categories of applicants eligible for marketing permits, which allow the holder to conduct tastings and bottle sales at other locations, to certain suppliers and “brand owners.”  Licensed wholesalers and importers would be allowed to obtain a “distributor’s tasting permit” for consumer tastings. “Brand owner” is not defined in the current version, and is likely to spark a battle if it includes, for example, foreign producers, celebrities, and non-producers.

Special Events: Manufacturers and “brand owners” would be able to obtain a permit to sell wine, beer or cider by the glass at special events.

Retailer Tastings:  Grocery stores licensed to sell beer would be able to conduct consumer beer tastings, though all beer poured must be from kegs, not bottles or cans. (The keg requirement was apparently intended to provide some assurance to certain local jurisdictions that have experienced problems with open container violations, though the SLA did indicate that it could be changed down the road if grocery beer tastings go smoothly in the interim).

Wine Growlers:  Retailers would be able to sell wine in growlers.  There is no indication yet how the legislation would address the fact that the TTB currently requires a federal basic permit as a tax-paid bottling house for a retailer to sell growlers; perhaps there would be an exemption provided in the final enabling legislation.

The significance of these proposed measures lies in their potential effect on the three-tier system, not just in NY but in every state that looks to NY for guidance.  Will the proposed changes be viewed by the distribution tier as an attack on their privileges, or as reasonable measures designed to facilitate routes to market for small producers?

Minimum Resale Price Policies - How to Control Price-Cutters

Over the course of the last two decades our firm has fielded many complaints from our supplier clients about retailers who sell their alcoholic beverage products below cost, a tactic that harms the supplier’s brands, discourages other retailers who are unable to match those prices from buying the products and devastates the supplier’s market pricing strategies.  Adding insult to injury, these below-cost price advertisements are often mere tactics intended to lure consumers to the store, where they are guided to other brands in lieu of the (now “sold out”) brand they saw in the advertisement.  These “bait and switch” tactics are especially pernicious when they show up in on-line price search engines. Until recently, suppliers assumed their hands were tied – retailers set their own prices, and suppliers are not allowed to dictate what those may be. Right?

Yes and no. While minimum resale price requirements are a tricky business and the law is still evolving in this area, it is possible to establish and maintain a minimum resale price policy that will stand up to legal challenges under federal and most state laws.

In 2007, the U.S. Supreme Court held in Leegin Creative Leather Products Inc. v. PSKS Inc. that an agreement between a supplier and reseller to set a minimum price threshold for a product may be legal so long as it does not unreasonably injure competition and in fact may actually encourage competition, depending on the circumstances. (The latter was certainly true for our supplier clients who had retail accounts unable to compete with the cost-cutting retailer.)

Unfortunately, the Leegin decision does not preempt state antitrust law, and states are free to decide whether to continue making such agreements illegal.

Suppliers can avoid this result, however, by establishing a minimum resale price policy that unilaterally announces a minimum resale price for the supplier’s products. Under the “Colgate policy” (named for the famous case that set the precedent), a doctrine established by the Supreme Court almost a century ago, it is perfectly legal for a manufacturer to announce its resale prices in advance and refuse to deal with those who do not wish to adhere to such prices. The most important aspect of this Colgate policy is the absence of an agreement, express or implied, between supplier and reseller. The policy must be one-sided and non-negotiable, and it cannot be adjusted to fit the circumstances of a particular reseller. The policy must have at least one business rationale behind it, and the supplier should provide its policy to all retailers prior to its implementation. In the short term this requires effort on the part of the supplier but in the long term this benefits the brand because it returns control of the brand in the marketplace to the supplier, where it belongs.

For more background and details on legal minimum price policies, as well as a sample resale price policy that prohibits below-retailer-cost pricing, read our recent article on this subject in Practical Winery & Vineyard.

 

 

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